Monday, March 1, 2010

Truth Be Told

There is no calamity greater than lavish desires
There is no greater guilt than discontentment
And, there is no greater disaster than greed.
-Lao Tzu (604 - 531 BC, "The Way of Lao Tzu")

This is one of the biggest Wall Street frauds ever...
By Porter Stansberry
About three years ago, I saw Goldman Sachs reporting quarter after quarter of unbelievable results when all of the other investment banks were hurting. I spent a lot of time looking at its numbers – which didn't make any sense. It reminded me of Enron. It kept reporting bigger and bigger profits, but lost more money every year in cash. And its debt balances kept growing.

I wrote a lot about this in The Digest, but I never officially recommended shorting Goldman in my newsletter because I literally couldn't figure out how Goldman Sachs was doing it. I couldn't find the smoking gun... but I knew a giant fraud would be discovered there, eventually.

In October 2008, I figured out part of the big secret: Goldman had insured all of its subprime exposure via AIG. This allowed it to book huge profits on its subprime investments long before they were actually paid off because the bonds were insured. Of course, it was all a sham – AIG didn't have nearly enough money to pay off any of the insurance. (See the October issue of PSIA for more details.) A source close to the company even told me how big the exposure to AIG really was – $20 billion. That's roughly 100% of the profit Goldman claimed in 2006 and 2007, at the height of the credit bubble. Goldman completely denied my report and claimed it had zero exposure to AIG.

As was subsequently revealed in the spring of 2009, my report was right on the money. Goldman had roughly $20 billion in exposure to AIG and received roughly $14 billion of money the federal government used to bail out AIG.

But I completely missed one big part of the story... And once this fact becomes common knowledge, it will probably mean jail time for several leading Goldman executives and the end of the firm. What did I miss? The entire Goldman-AIG relationship was a complete sham. Let me explain...

Goldman eventually admitted it had insured roughly $20 billion worth of subprime CDOs with AIG and had major exposure to the firm. But the New York Federal Reserve and Goldman Sachs never revealed this critical fact: Goldman didn't merely buy insurance on a bunch of random subprime CDOs. It actually bought insurance on special CDOs it had put together and sold to its own clients. In other words, Goldman knew more about these CDOs than anyone else. Goldman bought insurance on these CDOs because it knew they'd collapse.

This is tantamount to building a house, planting a bomb in it, selling it to an unsuspecting buyer, and buying $20 billion worth of life insurance on the homeowner – who you know is going to die!

Banks Bet Greece Defaults on Debt They Helped Hide
Bets by some of the same banks that helped Greece shroud its mounting debts may actually now be pushing the nation closer to the brink of financial ruin.

Echoing the kind of trades that nearly toppled the American International Group, the increasingly popular insurance against the risk of a Greek default is making it harder for Athens to raise the money it needs to pay its bills, according to traders and money managers.

These contracts, known as credit-default swaps, effectively let banks and hedge funds wager on the financial equivalent of a four-alarm fire: a default by a company or, in the case of Greece, an entire country. If Greece reneges on its debts, traders who own these swaps stand to profit.

"It's like buying fire insurance on your neighbor's house -- you create an incentive to burn down the house," said Philip Gisdakis, head of credit strategy at UniCredit in Munich.

As Greece's financial condition has worsened, undermining the euro, the role of Goldman Sachs (GS) and other major banks in masking the true extent of the country's problems has drawn criticism from European leaders. But even before that issue became apparent, a little-known company backed by Goldman, JP Morgan Chase (JPM) and about a dozen other banks had created an index that enabled market players to bet on whether Greece and other European nations would go bust.

And let's not forget for a single minute that it is Goldman Sachs that sits beside the President of the United States. The "Vampire Squids" tentacles reaching into The Treasury Department, The Federal Reserve, The SEC, The Council of Economic Advisers... And US Debt is considered "safe"?

Brisk 5.9 percent growth in Q4 will likely fade
WASHINGTON (AP) -- The recovery is losing steam.

The U.S. economy is now likely expanding at just half the brisk 5.9 percent pace at which the government on Friday estimated it grew last quarter. Business spending will make up for some of a slowdown in consumer spending -- but not likely enough to reduce the jobless rate much.

All that adds up to a long slog ahead for an economy trying to get back on firm footing after the worst recession since the 1930s. The economy continues to grow. But it won't feel like much of a recovery this year amid high unemployment, record-high home foreclosures and tight credit.

Stuart Hoffman, chief economist at PNC Financial Services Group, called the year-end growth spurt "a one-hit wonder."

This may well prove to be the understatement of 2009. How the 4th quarter GDP "estimate" got raised is no mystery. The final report on 4th quarter GDP later this month will come in close to 1% lower...

"The last duty of a central banker is to tell the public the truth."
-- Alan Blinder, [then] Vice Chairman of the Federal Reserve, on PBS's Nightly Business Report in 1994

[note that Alan Blinder is an economics professor at Princeton, where Bernanke was Chairman of the economics department...]

Tough guy Bernanke blows smoke
Fed Chairman Ben Bernanke appeared before Congress this week wearing his "bad guy" face.

The Washington Times reported on Bernanke's Wednesday testimony:

With uncharacteristic bluntness, Federal Reserve Chairman Ben S. Bernanke warned Congress on Wednesday that the United States could soon face a debt crisis like the one in Greece, and declared that the central bank will not help legislators by printing money to pay for the ballooning federal debt.

"We're not going to monetize the debt," Mr. Bernanke declared flatly ...

These statements are unequivocal. It will be interesting to see how Bernanke rationalizes his way out of this testimony. I don't believe he can stop and pointed the reasons out in an AT post, Obama's Ides-of-March Moment is Near on 2/24.

My guess is that Bernanke's wiggle room will turn on something akin to what the definition of "is" is. It is likely to turn on a narrow definition of Quantitative Easing (QE) or "monetizing the debt." The Fed considers monetizing the debt a direct purchase of newly-issued Treasuries. But QE, as monetizing the debt is known, can be performed indirectly and, I suppose, claimed to be not QE

Here is a simple example illustrating both direct and indirect methods that show their equivalence. First the direct example: Suppose the Treasury was to issue another $50 billion of debt and the Fed bought it directly. That would clearly be considered QE. The nation's money supply would increase by $50 billion. The Fed's balance sheet would increase by $50 billion of new Treasuries.

Here is one way that indirect QE occurs and has occurred. A bank has toxic assets of $50 billion that it wants to get rid of. The Fed agrees to buy them at face value so long as the bank uses the proceeds to buy Treasuries from a primary dealer. The Fed's balance sheet has increased by $50 billion of toxic assets (presumably worth less) while $50 billion of new money has been created to buy them. The $50 billion goes into new Treasuries, recently bought by the primary dealer.

Economically there is absolutely no difference between the first and second example. They are both QE, regardless of whether the Fed says they are or not. To understand whether QE is taking place, all one has to do is look at the total assets of the Federal Reserve Balance Sheet. If they are increasing, QE is occurring.

You will know when QE stops one other way. Social Security or Medicare payments will stop.

U.S. Consumer Spending Increases More Than Forecast
March 1 (Bloomberg) -- Spending by U.S. consumers increased in January for a fourth consecutive month, a sign that the biggest part of the economy may contribute more to growth in coming months.

But did it really? Or did inflation just give the "illusion" that spending increased?

The Core Personal Consumption Expenditure released by the US Bureau of Economic Analysis is an average amount of money that consumers spend in a month. "Core" excludes seasonally volatile products such as food and energy in order to capture an accurate calculation of the expenditure. It is a significant indicator of inflation.

So if consumer spending is measured solely by the "amount of money" that consumers spend, it would be safe to say that a rise in prices would equate to a rise in spending...provided the consumer bought the same quantity of goods. If he bought fewer goods, and spending rose, it would confirm inflation caused the rise in consumer spending.

Unfortunately the government does not measure the Quantity of goods sold, just how much money was spent. And therein lies the lie about our economy. Rising prices, via persistent inflation, give the illusion that spending is rising and the economy is growing. In fact, the only thing growing consistently is the supply of money.

It was reported today that "core" consumer spending rose 1.5% last year. Strangely enough two weeks ago it was reported that "core" CPI rose 1.6%. If these numbers are accurate [they are reported from US Government agencies after all], the it would appear that consumer spending has not risen at all. The only thing that has risen is prices, which of course the government denies.

The Grand Illusion.

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